Ultimate WSP Accounting Crash Course Exam – Latest Exam Version 4

Wall Street Prep: Accounting Crash Course
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1. What is Accounting?: Accounting is the language of business; it is a standard
set of rules for measuring a company's financial performance.
Assessing a company's financial performance is important for:
The firm's officers (managers and employees)
Investors
Lenders
General public
Standard financial statements serve as a "yardstick" of communicating financial
performance to the general public.
2. Why is Accounting Important?: Enables managers to make corporate deci-
sions
Enables the general public to make investment decisions
3. Who Uses Accounting?: Used by a variety of organizations - from the federal
government to non-profit organizations to small businesses to corpor ations
We will discuss accounting rules as they pertain to publicly-traded c ompanies
4. Accounting Regulations: Accounting attempts to standardize financial informa-
tion and follows rules and regulations
These rules are called Generally Accepted Accounting Principles (GAAP)
In the US, the Securities and Exchange Commision (SEC) authorizes the Financial
Accounting Standards Board (FASB) to determine accounting rules
GAAP comes from the Statements of Financial Accounting Standards (SFAS)
issued by the FASB
5. An Overview of the SEC: A US federal agency established by the US Congress in
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1934
Primary mission is "to protect investors and maintain the integrity of t he securities
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markets"
Division of Corporate Finance oversees FASB
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6. An Overview of FASB:Established in 1973 as an independent body to carry out the
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function of codifying accounting standards on the behalf of the S
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Composed of seven full-time members appointed for five years by the
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Account Foundation (FAF) i i




Decisions are influenced by: i i i




7. International Financial Reporting Standards (IFRS): Over 100 countries, in- i i i i i i i i i




cluding the EU, UK, Canada, Australia, and Russia, have adopted a unified set of
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international accounting standards (IFRS) i i i




Although we have seen unprecedented convergence over the last few years be-
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tween US GAAP and IFRS, some differences remain
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, Wall Street Prep: Accounting Crash Course
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8. Assumption 1:Accounting Entity: Acompanyisconsidered aseparate "living" i i i i i i i i i i




enterprise, apart from its owners i i i i




In other words, a corporation is a "fictional" being
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9. Assumption 2:Going Concern: A company is considered a "going concern" for the i i i i i i i i i i i i i




foreseeable future;it is assumed to remain in existence indefinitely i i i i i i i i i




10. Assumption3:Measurement:Financialstatementscanonlyshowmeasurable i i i i i i i i i




activities of a corporation such as its quantifiable resources, its liability, amount of
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taxes it is facing, etc. i i i i




11. Assumption 4: Periodicity: Companies are required to file annual and interim i i i i i i i i i i i




reports
In the US, quarterly and annual financial reports are required
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An accounting year (fiscal year) is frequently aligned with the calendar year
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12. Four Underlying Assumptions of Accounting: (1) Accounting Entity
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(2) Going Concern i




(3) Measurement
(4) Periodicity
13. Principle1:HistoricalCost:Financialstatementsreportcompanies'resources at i i i i i i i i i i




an initial historical cost
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Why?
Represents the easiest measurement method without a need for appraisal and i i i i i i i i i i i




revaluation
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Markingresourcesuptofairvalueallowsformanagementdiscretionandsubjectivity,
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which US GAAP attempts to minimize by using historical cost
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Note:IFRS allows you to write up the asset to fair value, but most companies use
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historical value anyways i i




14. Principles 2 and 3: Accrual Accounting (Revenue Recognition and Match- i i i i i i i i i i




ing Principle): Governs the company's timing in recording its revenues (i.e. sales)
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and associated expenses i i




2) Revenue Recognition:Accrual basis of accounting dictates that revenues must i i i i i i i i i i




be recorded when earned and measurable
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3) Matching Principle:Under the matching principle, costs associated with making i i i i i i i




a product must be recorded during the same period as revenuegenerated from that
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product

Exercise Answer:1) 1/4/15;2) 1/4/15 i i i i i




15. Why can't companies immediately record these revenues and expenses?-
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: According to the revenue recognition principle, a company cannot record revenue
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until that order is shipped to a customer (only then, is the revenue actually earned)
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and collection from that customer is reasonably assured
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, Wall Street Prep: Accounting Crash Course
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16. Why shouldn't a company record an expense when it actually buys the
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item?: According to the matching principle, costs associated with the production of
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theproductshouldberecordedinthesameperiodastherevenuefromtheproduct's sale
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17. US GAAP vs. IFRS Accrual Accounting: i i i i i i i




18. Principle 4: Full Disclosure: Companies must reveal all relevant economic i i i i i i i i i i




information that they determine to make a difference to its users i i i i i i i i i i




Such disclosure should be accomplished in the following sections of companies'
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reports:
(1) Financial statements i




(2) Notes to financial statements i i i




(3) Supplementary information i




19. Four Underlying Principles in Accounting: (1) Historical Cost
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(2) Accrual Accounting:Revenue Recognition i i i




(3) Accrual Accounting:Matching Principle i i i




(4) Full Disclosure i




20. Constraint 1: Estimates & Judgments: Certain measurements cannot be i i i i i i i i i




performed completely accurately, and must therefore utilize conservative estimates
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and judgments i




21. Constraint 2: Materiality: Inclusion and disclosure of financial transactions in i i i i i i i i i i




financial statements hinge on their size and effect on the company performing them
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Note:Materiality varies across different entities
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22. Constraint3:Consistency: Eachcompanyhastopreparefinancialstatements i i i i i i i i i i




using measurement techniques and assumptions which are consistent from one
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period to another i i




23. Constraint 4: Conservatism: Financial statements should be prepared with a i i i i i i i i i i




downward measurement bias i i




Assetsandrevenuesshouldnotbeoverstated,whileliabilitiesandexpensesshould not
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be understated
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24. Four Underlying Constraints in Accounting: (1) Estimates & judgments
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(2) Materiality
(3) Consistency
(4) Conservatism
25. Summary of Accounting Assumptions, Principles, Constrai nts: Most im- i i i i i




portant are the historical cost, revenue recognition, and matching pri nciples
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